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Understanding commercial subleases - avoiding the nightmare

31 March 2016

Subleasing is a common transaction for many businesses and not obtaining the appropriate legal advice prior to entering into such an arrangement can be a costly mistake.

Initially, a tenant and landlord enter into a deed of lease in respect of a particular premises.  This is subsequently referred to as the ‘headlease’ in the event that the tenant wishes to sublease part of the premises.  The terms of the headlease often require the landlord’s prior written consent to a sublease.  In such a situation, it is important that the deed of sublease accurately reflects the arrangement between the parties and that the tenant, landlord and subtenant each obtain independent legal advice.

A number of matters require particular attention when considering a Deed of Sublease

1. Tenant liability under the headlease 

Despite subleasing part of the premises, the tenant under the headlease remains personally liable to the landlord for all rent and outgoings in respect of the entire premises.  Furthermore, the landlord must give their prior written consent to the subtenant.  In this way, it is important that a tenant subleases to a reputable and reliable subtenant and takes urgent action if the tenant fails to make any payments.

2. Length of sublease 

The Property Law Act 2007 sets out that a sublease with a term which exceeds the term of the headlease, will expire when the headlease expires regardless.  Tenants and subtenants need to ensure that the terms of the sublease do not contradict the headlease in this way to avoid unexpected business upheavals.  In addition, if the headlease provides the tenant with rights of renewal, the sublease may need to include a clause requiring the tenant to exercise such renewals to protect the subtenant’s term and rights of renewal.

3. Business use 

A deed of lease includes specific reference to the tenant’s business use.  If a subtenant is proposing to operate a business which does not fall in to the description set out in the headlease, then it will be necessary to obtain the landlord’s prior written consent to the different use.

4. Landlord consent 

A landlord cannot unreasonably withhold their consent under a Deed of Lease, including when considering the approval of subtenants or variations to business use.  However, the tenant is generally responsible for the reasonable costs of the landlord in considering and consenting to such matters.

Leases deal with property, so errors and conflict can be costly for all parties involved.  Landlords, tenants and subtenants should always seek legal advice before entering into any commercial leases or variations of the same.

 

Shelly Harrison is a Solicitor in the Commercial Business and Rural teams at Norris Ward McKinnon. You can contact Shelly at shelly.harrison@nwm.co.nz